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Extra info for Accounts demystified : how to understand financial accounting and analysis

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10,000. 6 30 Share capital Cash Claims Assets Share capital Retained profit Claims C R E AT I N G A B A L A N C E S H E E T SBL sold, for £12,000 paid cash on delivery, stock which had only cost SBL £6,000. The £6,000 profit is not owed to anyone else, so it must belong to the shareholders. This, therefore, is a transaction which affects the shareholders’ wealth. The cash box goes up by £12,000 (since this is how much cash SBL received) and the stock box goes down by £6,000 (since this is the value of the stock sold).

We included sales in our balance sheet even when they were not paid for at the time of delivery. This is what I called the ‘accruals basis’ of accounting. The other aspect of the accruals basis is that we must include all the costs involved in making those sales. This is known as matching. In this case, we know that telephone expenses have been incurred to achieve the sales we have already recognised in the accounts. Thus, under the matching principle, we must recognise these expenses even though the bill has not arrived.

Sarah agreed that SBL would pay them 10 per cent per year. Thus SBL paid £1,000 in interest at the end of the year. This was paid in cash so the cash box goes down again by £1,000, and once again it is the poor old shareholder who suffers: retained profit goes down by £1,000. 11 As we have already seen, in the course of the year, Sarah sold stock for £30,000 to be paid for at a later date. We accounted for this in Transaction 7. Later in the year, she actually collected £15,000 of the £30,000 owed by her customers.